ACCT3010

Intermediate Accounting I
Professor Amy Zang

Chapter 4

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 4 Income Statement and
Related Information

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 INCOME STATEMENT

Usefulness
 Evaluate past performance.

 Predict future performance.

 Help assess the risk or uncertainty of

achieving future cash flows.

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 INCOME STATEMENT

Limitations
 Companies omit items that cannot be
measured reliably.

 Income numbers are affected by the

accounting methods employed.

 Income measurement involves

judgment.

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 INCOME STATEMENT

Quality of Earnings
Companies have incentives to manage income

 to meet earnings targets or

 to make earnings look less risky.

Earnings management is the planned timing of revenues,

expenses, gains, and losses to smooth out earnings.

Quality of earnings is reduced if earnings management

results in information that is less useful for predicting future
earnings and cash flows.

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 FORMAT OF THE INCOME STATEMENT

Elements of the Income Statement

INCOME – Increases in economic benefits during the
accounting period in the form of
 inflows or enhancements of assets or

 decreases of liabilities

that result in increases in equity, other than those relating to

contributions from shareholders.

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 FORMAT OF THE INCOME STATEMENT

Elements of the Income Statement

INCOME includes both revenues and gains.
 Revenues - ordinary activities of a company
 Gains - may or may not arise from ordinary activities.

Revenue Accounts Gain Accounts

 Sales revenue  Gains on the sale of long-term
 Fee revenue assets
 Interest revenue  Unrealized gains on trading
 Dividend revenue securities.

 Rent revenue

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 FORMAT OF THE INCOME STATEMENT

Elements of the Income Statement

EXPENSES – Decreases in economic benefits during the
accounting period in the form of
 outflows or depletions of assets or

 incurrences of liabilities

that result in decreases in equity, other than those relating to

distributions to shareholders.

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 FORMAT OF THE INCOME STATEMENT

Elements of the Income Statement

EXPENSES include both expenses and losses.
 Expenses - ordinary activities of a company
 Losses - may or may not arise from ordinary activities.

Expense Accounts Loss Accounts

 Cost of goods sold  Losses on restructuring
 Depreciation expense charges
 Interest expense  Losses on the sale of long-
 Rent expense term assets

 Salary expense  Unrealized losses on trading

securities.
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 Income 1. Sales or Revenue
2. Cost of Goods Sold
Statement
Gross Profit
3. Selling Expenses
Intermediate
Components 4. Administrative or General Expenses
5. Other Income and Expense
Companies generally Income from Operations
present some or all of 6. Financing costs
these sections and totals
Income before Income Tax
within the income
7. Income Tax
statement.
Income from Continuing Operations
8. Discontinued Operations
Net Income
9. Non-Controlling Interest
10. Earnings Per Share
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 FORMAT OF
THE INCOME 1

STATEMENT 2

Includes all of the

major items in
previous list, except
4
for discontinued
operations.

9
10
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 CONDENSED
INCOME
STATEMENT

More representative of
the type found in
practice.

Company prepares
supplementary schedules to
support the totals.

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 INCOME FROM OPERATIONS

Gains and Losses

Additional items that may need disclosure:
 Losses on write-downs of inventories to net realizable value or of
property, plant, and equipment to recoverable amount, as well as
reversals of such write-downs.
 Losses on restructurings of the activities and reversals of any
provisions for the costs of restructuring.
 Gains or losses on the disposal of items of property, plant, and,
equipment or investments.
 Litigation settlements.
 Other reversals of liabilities.

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 INCOME FROM OPERATIONS
ILLUSTRATION 4-7
Gains and Losses Number of Unusual Items
Reported in a Recent Year
by 500 Large Companies

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 Income From Operations

Gains and Losses

IASB takes the position that both

 revenues and expenses and

 other income and expense

should be reported as part of income from operations.

Companies can provide additional line items, headings, and subtotals

when such presentation is relevant to an understanding of the entity’s
financial performance.

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 Reporting Various Income Items
ILLUSTRATION 4.8
Income before Income Tax Presentation of
Finance Costs

Illustration 4-8

Financing costs must be reported separately on the income

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 INCOME STATEMENT REPORTING

Earnings per Share

Net Income - Preferred Dividends

Weighted Average of Ordinary Shares Outstanding

 A significant business indicator.

 Measures the dollars earned by each ordinary share.

 Must be disclosed on the face of the income statement.

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 Earnings per Share

Illustration: Lancer, Inc. reports net income of $350,000. It

declares and pays preferred dividends of $50,000 for the year.
The weighted-average number of ordinary shares outstanding
during the year is 100,000 shares. Lancer computes earnings
per share as follows:
ILLUSTRATION 4-10

Net Income - Preferred Dividends

Weighted Average of Ordinary Shares Outstanding

$350,000 - $50,000
= $3.00 per share
100,000

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 INCOME STATEMENT REPORTING

Discontinued Operations
A component of an entity that either has been disposed of, or
is classified as held-for-sale, and:
1. Represents a major line of business or geographical area of
operations, or

2. Is part of a single, co-coordinated plan to dispose of a major

line of business or geographical area of operations, or

3. Is a subsidiary acquired exclusively with a view to resell.

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 INCOME STATEMENT REPORTING

Discontinued Operations
Companies report as discontinued operations

1. (in a separate income statement category) the gain or loss

from disposal of a component of a business.

2. The results of operations of a component that has been or

will be disposed of separately from continuing operations.

3. The effects of discontinued operations net of tax as a

separate category, after continuing operations.

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 DISCONTINUED OPERATIONS

Illustration: KC Products, a highly diversified company, decides to

discontinue its electronics division. During the current year, the
electronics division lost £300,000 (net of tax). KC sold the division at
the end of the year at a loss of £500,000 (net of tax).

Income from continuing operations £20,000,000

Discontinued operations:
Loss from operations, net of tax 300,000
Loss on disposal, net of tax 500,000
Total loss on discontinued operations 800,000
Net income £19,200,000

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 ILLUSTRATION 4-12
Income Statement

Divide by
weighted-
average
shares
outstanding

EPS

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 INCOME STATEMENT REPORTING

Allocation to Non-Controlling Interest

When a company prepares a consolidated income statement,

IFRS requires that net income be allocated to the controlling and
non-controlling interest. This allocation is reported at the bottom
of the income statement, after net income.

(amounts given)
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 INCOME STATEMENT REPORTING
BE4-3: Presented below is some financial information related to
Volaire Group. Compute the following: Other Income
and Expense

Revenues €800,000 €800,000

Income from continuing operations 100,000 100,000
Comprehensive income 120,000 120,000
Net income 90,000 90,000
Income from operations 220,000 - 220,000
Selling and administrative expenses 500,000 - 500,000
Income before income tax 200,000 200,000
€80,000

1-24 Advance slide in presentation mode to reveal answers. LO 4

 INCOME STATEMENT REPORTING
BE4-3: Presented below is some financial information related to
Volaire Group. Compute the following:
Financing
Costs
Revenues €800,000 €800,000
Income from continuing operations 100,000 100,000
Comprehensive income 120,000 120,000
Net income 90,000 90,000
Income from operations 220,000 220,000
Selling and administrative expenses 500,000 500,000
Income before income tax 200,000 - 200,000
€20,000

1-25 Advance slide in presentation mode to reveal answers. LO 4

 INCOME STATEMENT REPORTING
BE4-3: Presented below is some financial information related to
Volaire Group. Compute the following:

Income Tax

Revenues €800,000 €800,000

Income from continuing operations 100,000 - 100,000
Comprehensive income 120,000 120,000
Net income 90,000 90,000
Income from operations 220,000 220,000
Selling and administrative expenses 500,000 500,000
Income before income tax 200,000 200,000
€100,000

1-26 Advance slide in presentation mode to reveal answers. LO 4

 INCOME STATEMENT REPORTING
BE4-3: Presented below is some financial information related to
Volaire Group. Compute the following:
Discontinued
Operations
Revenues €800,000 €800,000
Income from continuing operations 100,000 100,000
Comprehensive income 120,000 120,000
Net income 90,000 - 90,000
Income from operations 220,000 220,000
Selling and administrative expenses 500,000 500,000
Income before income tax 200,000 200,000
- €10,000

1-27 Advance slide in presentation mode to reveal answers. LO 4

 INCOME STATEMENT REPORTING
BE4-3: Presented below is some financial information related to
Volaire Group. Compute the following: Other
Comprehensive
Income
Revenues €800,000 €800,000
Income from continuing operations 100,000 100,000
Comprehensive income 120,000 120,000
Net income 90,000 - 90,000
Income from operations 220,000 220,000
Selling and administrative expenses 500,000 500,000
Income before income tax 200,000 200,000
€30,000

1-28 Advance slide in presentation mode to reveal answers. LO 4

 Accounting Changes LEARNING OBJECTIVE 4
Explain the reporting of
and Errors accounting changes and errors.

Changes in Accounting Principle

 Retrospective adjustment.

 Cumulative effect adjustment to beginning retained earnings.

 Approach preserves comparability across years.

 Examples include:
► Change from FIFO to average-cost.

► Change from the percentage-of-completion to the

completed-contract method.

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 Changes in Accounting Principle

Change in Accounting Principle: Gaubert Inc. decided in March

2019 to change from FIFO to weighted-average inventory pricing.
Gaubert’s income before taxes, using the new weighted-average
method in 2019, is $30,000.
ILLUSTRATION 4.17
Pretax Income Data Calculation of a Change in
Accounting Principle

ILLUSTRATION 4.18
Income Statement
Presentation of a Change
in Accounting Principle
(Based on 30% tax rate)

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 Accounting Changes

Change in Accounting Estimates

 Accounted for in the period of change or the period of
and the future periods if the change affects both.
 Not handled retrospectively.
 Not considered errors.
 Examples include:
► Useful lives and residual values of depreciable assets.
► Uncollectible receivables.
► Inventory obsolescence.

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 Change in Accounting Estimates

Change in Estimate: Arcadia HS, purchased equipment for

$510,000 which was estimated to have a useful life of 10 years
with a residual value of $10,000 at the end of that time.
Depreciation has been recorded for 7 years on a straight-line
basis. In 2019 (year 8), it is determined that the total estimated
life should be 15 years with a residual value of $5,000 at the end
of that time.

Questions:

 Does prior years’ depreciation need to be restated?

 Calculate the depreciation expense for 2019.

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 After
Change in Accounting Estimates 7 years

Equipment cost $510,000 First, establish NBV

Residual value - 10,000 at date of change in
Depreciable base 500,000 estimate.
Useful life (original) 10 years
Annual depreciation $ 50,000 x 7 years = $350,000

Balance Sheet (Dec. 31, 2018)

Fixed Assets:
Equipment $510,000
Accumulated depreciation 350,000
Net book value (NBV) $160,000

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 After
Change in Accounting Estimates 7 years

Net book value $160,000 Depreciation

Residual value (new) 5,000 Expense calculation
Depreciable base 155,000 for 2019.
Useful life remaining 8 years
Annual depreciation $ 19,375

Journal entry for 2019

Depreciation Expense 19,375

Accumulated Depreciation 19,375

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 Accounting Errors

Corrections of Errors
 Result from:

► mathematical mistakes.

► mistakes in application of accounting principles.

► oversight or misuse of facts.

 Corrections treated as prior period adjustments.

 Adjustment to the beginning balance of retained

earnings.

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 Corrections of Errors

Illustration: In 2019, Tsang Ltd. determined that it incorrectly

overstated its accounts receivable and sales revenue by
NT$100,000 in 2018. In 2019, Tsang makes the following entry
to correct for this error (ignore income taxes).

Retained Earnings 100,000

Accounts Receivable 100,000

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 INCOME STATEMENT REPORTING

DIFFERENT INCOME CONCEPTS

Users and
preparers look at
more than just the
bottom line
income number,
which supports the
IFRS requirement to
provide subtotals
within the income
statement.

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 OTHER REPORTING ISSUES

Comprehensive Income
All changes in equity during a period except those resulting
from investments by owners and distributions to owners.

Includes:

 all revenues and gains, expenses and losses reported in net

income, and

 all gains and losses that bypass net income but affect
equity.

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 Comprehensive Income

Net Income
Income Statement (in thousands)
Other Comprehensive
Sales
Cost of goods sold
$ 285,000
149,000
+ Income
Gross profit 136,000
 Unrealized gains and
Operating expenses:
Selling expenses 10,000
losses on non-trading
Administrative expenses 43,000 equity securities.
Total operating expense 53,000
 Translation gains and
Income from operations 83,000
Other revenue (expense):
losses on foreign
Interest revenue 17,000 currency.
Interest expense (21,000)  Plus others
Total other (4,000)
Income before taxes 79,000
Income tax expense 24,000 Reported in Equity
Net income $ 55,000

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 Comprehensive Income

One Statement Approach ILLUSTRATION 4-21

One Statement Format:
Comprehensive Income

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 Comprehensive Income

Two Statement Illustration 4-19

Approach

ILLUSTRATION 4-22
Two Statement Format:
Comprehensive Income

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 OTHER REPORTING ISSUES

Statement of Changes in Equity

Required, in addition to a statement of comprehensive

income.
 Generally comprised of
► Share capital—ordinary,
► Share premium—ordinary,
► Retained earnings, and the
► Accumulated balances in other comprehensive
income.

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 Statement of Changes in Equity

Reports the change in each equity account and in total

equity for the period. Includes the following:
1. Accumulated other comprehensive income for the period.

2. Contributions (issuances of shares) and distributions

(dividends) to owners.

3. Reconciliation of the carrying amount of each component

of equity from the beginning to the end of the period.

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 Statement of Changes in Equity

ILLUSTRATION 4-23
Statement of Changes in Equity

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